In this last blog of an eight (8) part series we are examining the case law and methodology for calculating the value of a community lien on a sole and separate business.
Under Arizona law, generally a business or interest that you have in a business acquired or owned prior to the marriage is yours and your spouse has no legal ownership claim to it, but the marital community and your spouse may still have a legal, equitable lien against your business based on the efforts made by you during the marriage to operate this business and grow it – your work and efforts during the marriage are considered community efforts.
In the previous three blogs, we discussed different ways that an expert will arrive at a value for a business. Here, the business is sole and separate. In this scenario, there will be two values calculated – one for the business on the date of marriage and a second for the value of the business at the end of the marriage (usually the date of service for the divorce petition, but can be set at the different time depending on the circumstances).
The difference in those two values will be the key to figuring out whether or not an equitable community lien exists. The equitable interest or lien on a sole and separate business will only apply if there has been an increase in value of the sole and separate business during the marriage. Any increase attributable to the “community efforts” will be allocated or apportioned between the two spouses in a divorce. Rueschenberg v. Rueschenberg, 219 Ariz. 249, 254, 196 P.3d 852, 857 (App. 2008). Click here to read Court’s Opinion
If the business has increased in value during the marriage, then a calculation must be done to determine the amount of the increase in value attributable to community efforts and whether the community has received adequate compensation for those efforts.
This is the crux of the calculation set forth in the Cockriel/Rueschenberg line of cases. For example, let’s say that your sole and separate business was valued at $100,000 on or about date of marriage and is now two (2) years later, at the time of divorce, worth $300,000 – an increase in value of $200,000.
A valuation expert and/or the Court will look at two main items in analyzing the community interest in this increase in value.
First, we need to see if you have been compensated for your efforts during the marriage, i.e., were you taking a salary or receiving draws or other compensation during this time; how much this compensation was; and how does it compare with compensation for others in that type of business or field for a like position.
Second, we will need to calculate a reasonable rate of return for your initial sole and separate investment in the business. That rate of return can vary greatly depending on the circumstances of the business and can be a major point of contention.
For the purposes of our example, let’s say you paid yourself a salary of $50,000 a year and this salary was commensurate with the going expected salary in that type of business and position. And the rate of reasonable return for your investment was set at 10% per annum. So, if the increase in value was $200,000, you would have expected $40,000 as a reasonable return on your prior investment, leaving $160,000 of the increase as attributable to community efforts and subject to a community lien.
Based on your salary, the community was compensated for $100,000 of this during the two years of marriage leaving only $90,000 subject to a community lien to be allocated accordingly. Under this scenario, your spouse is entitled to $30,000 as and for their share of the community lien on the increase in value in your sole and separate business.
An experienced attorney well versed in Arizona law on this topic can be invaluable in saving you not only time but money on this issue by guiding you to the right experts, countering the other side’s arguments, and achieving an appropriate resolution to the case. If you would like to work with one of our experienced divorce attorneys, please call OWENS & PERKINS at 480.994.8824 to schedule your free 30 minute consultation.